Pilot Regime – Kick-starting the tokenization of financial instruments | Allen & Overy LLP

The regulation is part of measures proposed by the European Commission to ensure that the EU embraces the digital revolution in the financial sector.

Effective today, 22 June 2022, Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 establishing a pilot scheme (the Pilot Scheme) for market infrastructures based on ledger technology Distributed (Regulation 858) comes into effect. Unless otherwise specified, it will apply from March 23, 2023.


Regulation 858 is part of the “Digital Finance Package”, a set of measures proposed by the European Commission in September 2020 with the aim of identifying a digital finance strategy ensuring that the EU embraces the digital revolution in the financial sector. One of the priority areas identified in the strategy is to ensure that the EU financial services regulatory framework is supportive of innovation and does not pose barriers to the application of new technologies.

To enable innovation in a way that preserves financial stability while protecting investors, the European Commission is proposing a framework for crypto-assets, distinguishing between crypto-assets already regulated by EU legislation on financial services, as “financial instruments” under MiFID II, and other currently unregulated crypto-assets. Thus, to properly respond to the specificities of each asset class, the Digital Finance Package includes Regulation 858, which is about to come into force and only covers crypto-assets which, although issued and traded on DLT, fall under the definition of “financial instruments” under MiFID II (referred to as “tokenized financial instruments”) and a proposed Regulation of Crypto-Asset Markets (MiCAR), establishing a bespoke regime for crypto – previously unregulated assets (such as cryptocurrencies).

Therefore, Regulation 858 represents the first concrete action in this area and aims to create the pilot regime for market infrastructures based on distributed ledger technology (DLT market infrastructures), allowing these entities to benefit from exemptions from certain specific requirements of the Union’s financial regulation. service legislation. In particular, under certain conditions, the pilot scheme allows DLT market infrastructures to be temporarily exempted from the provisions and requirements of EU financial services legislation, such as CSDR (i.e. European Regulation No. 2014/909/EU), MiFIR (i.e. European Regulation No. 2014/600/EU) and MiFID II (i.e. European Directive No. 2014/65/EU), which could prevent the application of new technologies for the negotiation and settlement of transactions related to financial instruments issued using DLT.

Given the limited experience in trading crypto-assets qualified as financial instruments (DLT financial instruments), according to the European legislator, the experience gained through the pilot scheme should help identify targeted adaptations of European legislation on financial services to enable full development of the issuance, custody, trading and settlement of DLT financial instruments.

That said, it should be noted that the registration of securities, the maintenance of accounts and the management of settlement systems, as well as the regime of form and circulation of financial instruments, which are governed by non-harmonised provisions of national regulations (i.e. Italian) are not directly covered by Regulation 858. As such, careful consideration should be given to how the pilot scheme can be implemented in Italy taking into account the legal framework existing in civil and corporate matters applicable to financial instruments and if and how the Italian regime the legislator will consider possible modifications of this regime like other jurisdictions. See also our previous alert available here.

The pilot scheme

Scope of the pilot scheme

The pilot plan sets out requirements for:

  1. granting and withdrawing specific authorization to operate as a DLT market infrastructure and any relevant exemption from EU financial services legislation;
  2. impose, modify and withdraw the conditions as well as the compensatory or corrective measures attached to the exemptions granted;
  3. operate and oversee the DLT market infrastructure; and
  4. the form and arrangements for cooperation and coordination between DLT market infrastructures and national competent authorities and the latter with ESMA.

Types of titles

To ensure consumer and investor protection as well as market integrity, the pilot regime imposes certain limitations on the classes of assets that can be admitted to trading and settled in DLT market infrastructures. In particular, Regulation 858 provides that the types of financial instruments will be limited to stocks, bonds and units in undertakings for collective investment, provided that certain quantitative limits, varying according to each category of DLT financial instruments, are respected. In any event, the aggregate market value of all DLT financial instruments admitted to trading or registered on a DLT market infrastructure must not exceed EUR 6 billion at the time of admission to trading or first trading of a new DLT financial instrument.

The new status of “DLT market infrastructures” and the applicable derogations

To meet the objectives of the pilot scheme, the new status of DLT market infrastructures has been created. Under Regulation 858, DLT market infrastructures are defined as one of the following entities:

  1. DLT Multilateral Trading Facility (DLT MTF), i.e. a multilateral trading facility that only allows trading in DLT financial instruments;
  2. DLT settlement system (DLT SS), i.e. a settlement system which settles transactions in DLT financial instruments against payment or against delivery and which allows the initial recording of DLT financial instruments or allows the provision of custodial services in relation to DLT financial instruments; and
  3. DLT Trading and Settlement System (DLT TSS), i.e. an MTF DLT or a DLT SS that combines services provided by an MTF DLT and a DLT SS.

The above entities, upon specific authorization granted by the relevant national competent authority, may be temporarily exempted from some of the specific requirements of Union financial services law which might otherwise prevent operators from developing solutions for trading and the settlement of transactions on crypto-assets within the meaning of financial instruments. In particular, under the pilot regime, DLT market infrastructures may apply to be exempted from legal provisions (if any) concerning, among others:

  1. the obligation of intermediation, as envisaged by MiFID II, in order to provide direct access to MTF DLTs for retail investors and allow them to trade on their own account, provided that these retail investors fulfill certain conditions;
  2. certain transaction reporting requirements under MiFIR, provided that the MTF DLT meets certain conditions;
  3. the settlement requirements provided for in Articles 6 and 7 of the CSDR, provided that the DLT SS meets certain requirements, in particular the establishment of arrangements guaranteeing clear, precise and timely confirmation of the details of transactions in financial instruments DLT;
  4. certain relevant definitions (including, among others, the definition of “dematerialized form”, “transfer order” and “securities account”) and provisions (including the rules concerning the book entry form) provided for in the CSDR ; and
  5. cash settlement requirements under Article 40 of the CSDR, provided that the DLT SS settles on a delivery versus payment basis.

The European passport

The specific authorization to operate as a DLT market infrastructure is granted by the relevant national competent authority and is valid throughout the Union for a period of up to six years from the date of issue. Among other things, the specific authorization specifies the exemptions and the compensatory measures with which the specific infrastructures of the DLT market must respectively benefit from and comply.

This means that the exemptions granted under the pilot scheme are not firmly predetermined by the European legislators, but can be adapted to the specific business model that the relevant DLT market infrastructure intends to implement and to the characteristics and characteristics of the financial instruments. DLT eligible for trading. and regulation on this DLT market infrastructure.

How A&O can help you

A&O can help you navigate this emerging new regulatory framework by providing assistance in any of the following areas:

  1. the interactions between Regulation 858 and the Italian regime applicable to financial instruments;
  2. any possible development of the pilot scheme, including any potential initiatives you may adopt and provisions you may implement to manage the expectations of legislators or regulators;
  3. processing of the digitization of your financial instruments as well as in the definition of your digital asset strategy; and
  4. assess the benefits derived from admission to this regulatory sandbox.

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